Points vs. Rates: What's The Trade Off?

By Debbie Wilson
Loan Page Columnist

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You may be looking to refinance your current mortgage, but before you can compare loans, you must first understand loan costs. In its most simplistic form, a refinanced mortgage consists of rates, points, and fees. But without knowing all the facts, a loan that might look like a deal at first glance could be an altogether different story upon refinancing close.


What is a Point?

A point is a fee that is paid to the lender or broker of the loan. In more cases than not, points are indirectly linked to the interest rate. Usually, the more points you pay, the lower the interest rate. But because each program and mortgage lender use different formulas, the amount of points you pay on any given day fluctuates as market rates change.

Are Points Worth the Cost?

Deciding upon whether points are worth the cost has more to do with your specific short-term and long-term needs and goals than the actual cost of the points themselves. Because while paying points may cost you some money upfront, it has the potential to save you quite a bit of money in the long term, especially over the course of a 30-year refinanced mortgage. You just have to ask yourself whether you can afford the extra cash today to cover the point's cost in order to reap the future monthly savings throughout the course of the loan. Additionally, if you don't plan to stay in your home for a long period of time, paying points upfront might not be advantageous since you won't be paying on the refinanced mortgage long enough to realize future benefits.

Ultimately, only you can determine whether paying points is a benefit or detriment to your potential loan costs. What is important, however, is that you compare loans by reviewing similar information in each loan (loan amount, term, type, penalties, features, monthly payment, and A.P.R.). Only then will you know if points pay off.

Source www.ftc.gov

About the Author
Debbie Wilson owns and operates a lakeside resort. Her previous experience includes profitability consulting for a national healthcare company. Debbie holds a B.A. in Business Management with a minor in Physical Education.

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